Nassim Nicholas Taleb (born 1960) (alternative spellings of first name: Nessim or Nissim) is a literary essayist, epistemologist, polymath, scholar of randomness and knowledge, researcher, and former practitioner of mathematical finance. As a pioneer of complex financial derivatives, he held a “day job” in a lengthy senior trading and financial mathematics career in a number of New York City’s Wall Street firms, before starting a second career as a scholar in the epistemology of chance events to focus on his project of mapping how to live and act in a world we do not understand, and how to come to grips with randomness and the unknown – which includes his black swan theory of unexpected rare events. Taleb’s extremely idiosyncratic literary approach consists of providing a modern-day brand of philosophical tale by mixing narrative fiction, often semi-autobiographical, with erudition and scientific commentary … (full text).

Nassim Nicholas Taleb is an influential scholar who has written several books on randomness and the effect it has in our lives. I’ve heard great things about his books and have wanted to read them, so I thought I would start with Fooled by Randomness, which seeks to explore the effect randomness, rather than skill, has on our own success: … (full text, May 29, 2008).

He says: “My major hobby is teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say: I don’t know”.

He writes: … Last August, The Wall Street Journal published a statement by one Matthew Rothman, financial economist, expressing his surprise that financial markets experienced a string of events that “would happen once in 10,000 years”. A portrait of Mr Rothman accompanying the article reveals that he is considerably younger than 10,000 years; it is therefore fair to assume he is not drawing his inference from his own empirical experience but from some theoretical model that produces the risk of rare events, or what he perceives to be rare events … (full text, October 23 2007).

Other analysts, however, like Nouriel Roubini and Robert Shiller have seen their reputations blossom. And some like Nassim Nicholas Taleb have prospered amidst the carnage. An options trader turned philosopher … (full text, November 4, 2008).

He says also: “We humans are naturally gullible – disbelieving requires an extraordinary expenditure of energy. It is a limited resource. I suggest ranking the skepticism by its consequences on our lives. True, the dangers of organized religion used to be there — but they have been gradually replaced with considerably ruthless and unintrospective social-science ideology” … THE OPIATES OF THE MIDDLE CLASSES, by Nassim Taleb, Sept. 26, 2005.

He writes also: Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the “logic of science”; it is the instrument of risk-taking; it is the applied tools of epistemology; you can’t be a modern intellectual and not think probabilistically – but… let’s not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let’s face it: use of probabilistic methods for the estimation of risks did just blow up the banking system) … (THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS, Sept. 15, 2008).

… In Mediocristan, events are generated by a underlying random process that is normally distributed. These events are often physical and observable and they tend to cluster around the middle. Most people are near the average height and no adult is more than nine feet tall. But in Extremistan, the right-hand tail of events is thick and long and the outlier, the seemingly wildly unlikely event is more common than our experience with Mediocristan would indicate. Bill Gates is more than a little wealthier than the average. The civil war in Lebabon or the events of 9/11 were more worse than just a typical bad day in the Beirut or New York City. Taleb’s contention is that we often bring our intuition from Mediocristan for the events of Extremistan, leading us to error. The result is a tendency to be blind-sided by the unexpected:
Listen to the audio, 1.23′30 h, or Download the 19.2 MB … (full text).

… Options traders use a pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called “Black-Scholes-Merton” owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contradiction with it). However we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the “risk” parameter through “dynamic hedging”, 2) Option traders use (and evidently have used since 1902) heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. 3) Option traders did not use formulas after 1973 but continued their bottom-up heuristics. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop calling the formula by the wrong name … (full text, January 2008).

Some of his Quotes:

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur.I shiver at the thought …

and: Banks hire dull people and train them to be even more dull. If they look conservative, it’s only because their loans go bust on rare, very rare occasions. But (…) bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug …

and: Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most ﬁt for survival …